Competing with Non-Compete Provisions

You are married to your job. You are what you do. There is truth to the idea that we all identify ourselves with the profession we have chosen. So, what happens when someone tries to limit your ability to do that job? Most often, these limitations are presented in the form of a non-compete clause in a contract. Colorado does not look favorably on restricting competition or a person’s ability to work, and our legislature enacted law that defines very narrow exceptions to the general rule that covenants not to compete are void. Colorado Revised Statute Section 8-2-113 states that a contractual restriction on a person’s ability to perform “skilled or unskilled labor for any employer” is automatically unenforceable unless it falls into one of four categories.

The four scenarios in which Colorado courts will uphold a non-compete clause are:

1. One tied to the sale of a business or business assets;

2. One tied to the protection of trade secrets;

3. One that permits recovery of costs for training or educating an employee who serves an employer for less than two years; and,

4. One tied to officers, executive and management personnel, and employees who act as professional staff to executive and management personnel.

Under any one of these four exceptions, the non-compete clause must be reasonable, specifically in relation to the duration of the restriction and the geographic scope of the restrictioni. Covenants not to compete for terms up to five years and within a distance of 100 miles are commonly upheld; however, the reasonableness of these terms is always reviewed in light of the specific circumstances and interests involved.ii

Sale of a Business or Assets In relation to the sale of a business or its assets, the reasonableness depends on whether the restriction on competition provides “fair protection” to the buyer, particularly for the purchase of good will. The restrictions on competition cannot be any greater than necessary to protect that good will, and the scope of a covenant not to compete incident to the sale of a business may be enforceable where that same scope may be deemed unreasonable in relation to an employment agreement.iii In other words, the scope of restrictions contained within a purchase agreement may permissibly be broader than in an employment agreement. Any restrictions on the prior owner’s ability to work in competition should be specifically defined to address those prohibited activities.iv In some circumstances, a former owner may maintain a relationship with former clients or loan money to a competitor without violating the non-competition agreement; however, determining whether this type of conduct breaches the non-compete agreement depends on the language of the contract

If at any time the company sold goes out of business or liquidates its assets, the restriction on competition is void.v

Trade Secrets An employer or franchisor may prohibit an employee’s or franchisee’s use of trade secrets following termination of the relationship. For a covenant not to compete to fall within the trade secret exception in the statute, the restriction must specifically protect trade secrets and limit the scope to only protect those trade secrets, meaning it should not encompass data or processes that are not trade secrets.vi A trade secret may include “scientific or technical information, design, process, procedure, formula, improvement, confidential business or financial information, listing of names, addresses, or telephone numbers, or other information relating to any business or profession” that is kept secret and provides for some advantage over a competitor.vii Solely by way of example, trade secrets may include a product design, client list, or company manual that is not available to, accessible by, or readily ascertainable to the public at large.

Management PersonnelA covenant not to compete is not permissible for just any employee. Colorado’s statute limits the ability to restrict competition to executives, officers of a company, and “management personnel,” along with management’s professional staff. The employees that constitute “management personnel” may be a bit more unclear, but generally, Colorado courts have looked to whether the individual is “in charge” and acts in an unsupervised capacity. The determination is based on the employee’s skill, knowledge and autonomy, not on the employee’s proximity to or relationship with clients.ix

The restrictions on covenants not to compete are equally applicable to independent contractors, and therefore, any restrictions on an independent contractor’s ability to compete must also fall within one of the statutory exceptions, or it is automatically void.x

Buyers and sellers, as well as employees and employers are advised to consider the permissible restrictions on competition and define the limited scope necessary to protect the interests involved in order to assess the enforceability of such provision.

About the author

Nicole practices primarily in the areas of business litigation, including breach of fiduciary duty, breach of contract, and insider misconduct matters, and construction litigation, including construction defect cases.